Book a free discovery meeting

call: 01422 349 131

email: info@iftwm.com

Author: master-admin

2018/19 tax changes

New initiatives you need to know

Here’s what you need to know about the 2018/19 tax year changes and new initiatives.

Personal Allowance
The tax-free Personal Allowance is the amount of income you can earn before you have to start paying Income Tax. All individuals are entitled to the same Personal Allowance, regardless of their date of birth.

In the 2017/18 tax year, the Personal Allowance was £11,500, and it rises to £11,850 in the 2018/19 tax year. This means you can earn £350 more in the 2018/19 tax year than in the previous tax year before you start paying Income Tax. However, bear in mind that the Personal Allowance is restricted by £1 for every £2 of an individual’s adjusted net income above £100,000.

A spouse or registered civil partner who isn’t liable to Income Tax above the basic rate may transfer £1,185 of their unused Personal Allowance in the 2018/19 tax year, compared to £1,150 in the 2017/18 tax year to their spouse or registered civil partner, as long as the recipient isn’t liable to Income Tax above the basic rate.

Higher-rate threshold
The threshold for people paying the higher rate of Income Tax (which is 40%) increased from £45,000 to £46,350 in the 2018/19 tax year. This new figure also includes the increased Personal Allowance.

Dividend Allowance
The Chancellor of the Exchequer, Philip Hammond, announced in the Spring Budget 2017 that the Dividend Allowance would reduce from £5,000 to £2,000 from 5 April 2018.

Any dividend income that investors earn above the £2,000 allowance will attract tax at 7.5% for basic-rate taxpayers, while higher-rate taxpayers will be taxed at 32.5% and additional-rate taxpayers at 38.1%.

This may impact on shareholders of private companies paying themselves in the form of dividends, for example, rather than salary. Investors with portfolios that produce an income in the form of dividends of more than £2,000 a year, which are held outside ISA or pensions, will also be affected by the reduction in the allowance.

National Insurance Contributions (NICs)
NICs be charged at 12% of income on earnings above £8,424, up from £8,164 until you are earning more than £46,350, after which the rate drops to 2%. It’s the same in Scotland.

Auto enrolment contributions
Auto enrolment contribution rates have increased for employees and employers. In the previous 2017/18 tax year, the minimum pension contribution rate was 1% from the employee and 1% from the employer, which provides a 2% contribution. However, from 6 April 2018, the contribution rate increased to 3% for employees and 2% from the employer, totalling 5%.

Pension Lifetime Allowance
The Lifetime Allowance increased from £1 million to £1.03 million in the 2018/19 tax year. This is the maximum total amount you can hold within all your pension savings without having to pay extra tax when you withdraw money from them.
If the total value of your pension savings goes over the Lifetime Allowance, any excess will be taxed at a rate of 25% in addition to your marginal rate of Income Tax if drawn as income, or 55% if you take it as a lump sum.

State Pension
There has been a 3% rise for the old basic State Pension and the new flat-rate State Pension. If you’re on the basic State Pension (previously £122.30 per week), this has increased to £125.95. The flat-rate State Pension has increased from £159.55 to £164.35 a week.

Inheritance Tax
The residence nil-rate band (RNRB) has risen from £100,000 to £125,000. The RNRB enables eligible people to pass on a property to direct descendants and potentially save on death duties.

Capital Gains Tax
Capital Gains Tax is charged on profits that are made when certain assets are either transferred or sold. There’s no tax to pay if all gains made in a tax year fall within the annual Capital Gains Tax allowance. For the 2018/19 tax year, this will be £11,700 (it was £11,300 for the 2017/18 tax year).

Buy-to-let landlords
Changes mean that only 50% of mortgage interest will be able to be offset when calculating a tax bill, compared with 75% previously.

Is inflation back? Don’t panic!

How to protect the value of your money from its effects

The BOE forecasts that consumer price inflation will remain above 2% in each year until 2021. While nowhere close to historic highs, higher inflation stands in contrast to near record low interest rates offered on cash savings.

To protect your purchasing power over time, your savings need to grow at least as quickly as prices are rising. So how can savers and investors protect the value of their money from its effects?

Cash is not king
The positive for cash savings is that they are very secure up to £85,000 in a bank or building society through the Financial Services Compensation Scheme, unlike other investments where your capital will be less secure. And keeping enough cash aside to cover any foreseeable costs you might face is always sensible.

However, relying solely or overly on cash might prevent you from achieving your long-term financial goals, which may only be possible if you accept some level of investment risk. And in an environment where the cost of living is rising faster than the interest rates on cash, there is a danger that your savings will slowly become worth less and less, leaving you worse off down the road.

Inflation-linked protection
Bondholders receive regular income payments, known as ‘coupons’, from the Government or company that issued the bond. Where coupons are fixed in value for the life of the bond – often several years – the real value of this income will be eroded if prices rise. The nominal value of the bond (known as the ‘principal’) will also be worth less when it matures and the loan is repaid.

Protection against this threat is offered by inflation-linked bonds, whose coupons and principal will track prices. By linking coupons to prices, the income that investors receive will rise in line with inflation, so they should be left no worse off – unless, of course, the bond issuer fails to keep up with repayments (an unavoidable risk for bond investors).

However, if prices fall, so would the value of inflation-linked bonds and the income from them – in contrast to bonds, whose principal and coupons are fixed, and so would then be worth more in real terms. If inflation falls, protection from it rising can therefore come at a price.

Combining equity returns
To beat rising prices, the total returns from any investment – being the combination of capital growth and any income – must be greater than the rate of inflation. Company shares, or equities, potentially offer long-term investors a degree of protection during inflationary periods. Ultimately, shares are claims to the ownership of real assets, such as land or factories, which should appreciate in value if overall prices increase.

In theory, equity returns should therefore be inflation-neutral, so long as companies can pass on any higher costs they face and maintain their profitability. In turn, a company’s ability to make money will typically be reflected in its share price and its ability to provide investors with an income in the form of a dividend. Also, the sum of a company’s shares can be much greater than the value of its physical assets.

Where higher inflation squeezes consumers’ purchasing power, however, some companies may find it difficult to pass on higher costs, reducing profitability and, probably, investment returns. Just as a company can raise its dividend in line with inflation, it can choose to cut or stop the payout at any point.

Take an active investment approach
Selecting the right combination of investments to navigate rising inflation could be challenging for many individual investors. By investing through a fund that pools your money with other investors, you can gain access to expertise as well as a wider range of investments.

Professionally managed ‘active’ funds will aim to achieve a specific objective by investing in certain assets, with an approach to risk and return that may align with yours. The objective of an actively managed fund could resonate with your own goals – something that ‘passive’ funds, which look to mirror the performance of a broad index, may not be able to do.
Active fund managers can take inflation into account in pursuit of their objective, which could be providing their investors with a growing income stream or achieving capital growth over the long term.

Some funds even specifically aim to deliver total returns in line with, or greater than, a given measure of inflation – for example, consumer prices in the UK. Unlike those who passively invest, active managers can handpick assets they think are less likely to suffer, or more likely to gain, from any change in the rate of inflation.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

Your money, your choice

Supporting your future financial requirements

Building up a substantial pension pot
The term ‘private pension’ covers both workplace pensions and personal pensions. The UK Government currently places no restrictions on the number of different pension schemes you can be a member of. So, even if you already have a workplace pension, you can have a personal pension too, or even multiple personal pensions. These can be a useful alternative to workplace pensions if you’re self-employed or not earning, or simply another way to save for retirement.

Any UK resident between the ages of 18 and 75 can pay into a personal pension – although the earlier you invest, the more likely you are to be able to build up a substantial pension pot. However, the maximum that can be contributed to all your pensions during the tax year and receive tax relief (known as the ‘annual allowance’) is £40,000.

Tax relief on pension contributions
A private pension is designed to be a tax-efficient savings scheme. The Government encourages this kind of saving through tax relief on pension contributions.

In the 2018/2019 tax year, pension-related tax relief is limited to either 100% of your UK earnings, or £3,600 per annum – whichever is highest. Contributions are also limited by the current annual (£40,000) and lifetime allowance (£1,030,000).

Pension tax relief rates:
Basic-rate taxpayers will receive 20% tax relief on pension contributions
Higher-rate taxpayers also receive 20% tax relief, but they can claim back up to an additional 20% through their tax return
Additional-rate taxpayers again pay 20% tax relief, but they can claim back up to a further 25% through their tax return
Non-taxpayers receive basic-rate tax relief, but the maximum payment they can make is £2,880, to which the Government adds £720 in tax relief, making a total gross contribution of £3,600

Annual allowance
The annual allowance is the maximum amount that you can contribute to your pension each year while still receiving tax relief. The current annual allowance is capped at £40,000, but may be lower depending on your personal circumstances.

In April 2016, the Government introduced the tapered annual allowance for high earners, which states that for every £2 of income earned above £150,000 each year, £1 of annual allowance will be forfeited. The maximum reduction will however be £30,000 – taking the highest earners’ annual allowance down to £10,000.

Any contributions over the annual allowance won’t be eligible for tax relief, and you will need to pay an annual allowance charge. This charge will form part of your overall tax liability for that year, although there is the option to ask your pension scheme to pay the charge from your benefits if it is more than £2,000. It is worth noting that you may be able to carry forward any unused annual allowances from the previous three tax years.

Lifetime allowance
The lifetime allowance (LTA) is the maximum amount of pension benefit that can be drawn without incurring an additional tax charge, currently £1,030,000. What counts towards your LTA depends on the type of pension you have:

Defined contribution – personal, stakeholder and most workplace schemes – the money in pension pots that goes towards paying you, however you decide to take the money

Defined benefit – some workplace schemes – usually 20 times the pension you get in the first year plus your lump sum – check with your pension provider

Your pension provider will be able to help you determine how much of your LTA you have already used up. This is important because exceeding the LTA will result in a charge of 55% on any lump sum and 25% on any other pension income such as cash withdrawals. This charge will usually be deducted by your pension provider before you start getting your pension.

Pension protection
It’s easier than you think to exceed the LTA. If you are concerned about exceeding your LTA, or have already done so, it’s essential to obtain professional financial advice. It may be that you can apply for pension protection. This could enable you to retain a larger LTA and keep paying into your pension – depending on which form of protection you are eligible for. We can assess and review the options available to your particular situation.

Alternative savings
In addition to pension protection, if you have reached your LTA (or are close to doing so), it may also be worth considering other tax-effective vehicles for retirement savings, such as Individual Savings Accounts (ISAs). In the current tax year, individuals can invest up to £20,000 into an ISA.

The Lifetime ISA launched in April 2017 is open to UK residents aged 18–40 and will enable younger savers to invest up to £4,000 a year tax-efficiently – and any savings you put into the ISA before your 50th birthday will receive an added 25% bonus from the Government. After your 60th birthday, you can take out all the savings tax-free, making this an interesting alternative for those saving for retirement.

Pension beneficiaries
There will normally be no tax to pay on pension assets passed on to your beneficiaries if you die before the age of 75 and before you take anything from your pension pot – as long as the total assets are less than the LTA. If you die aged 75 or older, the beneficiary will typically be taxed at their marginal rate.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

Generous grandparents

The bank that likes to say ‘yes’

Forget the Lamborghini – 2.4 million UK grandparents[1] have either raided their pension to support their grandchildren or plan to in the future. According to research from LV=, a quarter of generous grandparents (25%) who have already given away money to their grandchildren[2] have taken the funds from their pension. A further one in six (16%) plan to use their pension for this reason once they reach retirement age.

Substantial amounts
Open-handed grandparents are willing to give away substantial amounts to their grandchildren, whether from their pensions, savings or wages, with the average grandparent having already spent £1,633. More than one in 20 (6%) have given gifts of more than £10,000.

The generosity shows no sign of stopping, with many grandparents (56%) planning to give away even more money in future. The average grandparent expects to give away £2,938 in the coming years, with charitable grandmas expecting to give away £173 more than grandads on average.

Living inheritance
Pension savings are used to help with a wide range of things, from helping grandchildren get on the housing ladder (21%) and other high-ticket items like university fees (20%) or cars (17%). A similar number would help out with more day-to-day expenses like bills (21%) and hobbies (19%).

Grandparents often view the financial gifts they make as a ‘living inheritance’, with more than a third (37%) wanting to be around to see their grandchildren enjoy the money[3].

Retirement focus
Its heart-warming to see grandparents so willing to help out their grandchildren both day-to-day and with large ticket purchases. With one in five using their pension to help out, it’s important these kind individuals plan for their retirement and have enough money left for themselves, as even smaller outgoings like bills can become harder to meet later in life, as well as the flexibility to access it.

The generosity of grandparents in Britain is clear to see, and it is great that so many feel comfortable enough to be able to help out their family and plan to continue doing so. However, the average retirement is now much longer than past generations, and people’s lifestyle and associated costs are likely to change over this period.

Source data:
[1] According to ONS Population Pyramid, there are 49,533,900 people aged over 18 in the UK. The research found that 39% of a sample of 2,002 adults were grandparents, indicating there are 19,318,221 grandparents in the UK. 56% of grandparents have helped or plan to help their grandchildren, and 22% of these would use their pension to do so. Therefore, 2.38 million grandparents have helped or plan to help their grandchildren, using their pension.
[2] According to research carried out by Opinium Research on behalf of LV=, 25% of grandparents have already taken money from their pension to give to their grandchildren.
[3] Statistics from research carried out on behalf of LV= by Opinium Research in June 2014 (total sample size = 2043). The press release for this research was issued on 20 June 2014.
The research was carried out by Opinium Research from 13–16 October 2015. The total sample size was 786 British grandparents over the age of 30, and the survey was conducted online. Results are weighted to a nationally representative criteria.

Guide to New Tax Year Planning 2018/19

Time to take a tax wealth check?

Now that we’ve entered the 2018/19 tax year, a number of key changes have taken place to existing policies, along with some newly introduced initiatives. It’s important to consider these tax implications when making financial decisions.

The key changes to existing policies and newly introduced initiatives

To help you navigate your way through the main changes that could have an impact on your financial situation, we’ve provided a summary of the main 2018/19 tax year changes that have come into force. The good news is that the overall tax burden is little changed for basic-rate taxpayers, but there are a number of areas that have changed that should be taken note of.

Taking action at the start of the 2018/19 tax year may give you the opportunity to take advantage of appropriate reliefs, allowances and exemptions, and consider whether there are any relevant decisions that you need to make sooner rather than later.

Here’s what you need to know about the 2018/19 tax year changes and new initiatives.

Personal Allowance

The tax-free Personal Allowance is the amount of income you can earn before you have to start paying Income Tax. All individuals are entitled to the same Personal Allowance, regardless of their date of birth.

In the 2017/18 tax year, the Personal Allowance was £11,500, and it rises to £11,850 in the 2018/19 tax year. This means you can earn £350 more in the 2018/19 tax year than in the previous tax year before you start paying Income Tax.

However, bear in mind that the Personal Allowance is restricted by £1 for every £2 of an individual’s adjusted net income above £100,000.

A spouse or registered civil partner who isn’t liable to Income Tax above the basic rate may transfer £1,185 of their unused Personal Allowance in the 2018/19 tax year, compared to £1,150 in the 2017/18 tax year to their spouse or registered civil partner, as long as the recipient isn’t liable to Income Tax above the basic rate.

Income Tax

The starting point for paying 20% basic-rate tax is £11,850, while 40% tax will start on earnings above £46,350 (up from £45,000).

Scotland

In Scotland, the first £2,000 of earnings after the Personal Allowance is taxed at 19% rather than 20%. After that, it’s 20% tax until your earnings hit £24,000, when it rises to 21%, then above £43,430 the rate is 41%. Both have an upper rate above £150,000; in England it’s 45%, in Scotland 46%.

Higher-rate threshold

The threshold for people paying the higher rate of Income Tax (which is 40%) increased from £45,000 to £46,350 in the 2018/19 tax year. This new figure also includes the increased Personal Allowance. The Government has already committed to raising the higher-rate threshold to £50,000 by 2020.

Dividend Allowance

The Chancellor of the Exchequer, Philip Hammond, announced in the Spring Budget 2017 that the Dividend Allowance would reduce from £5,000 to £2,000 from 5 April 2018.

Any dividend income that investors earn above the £2,000 allowance will attract tax at 7.5% for basic-rate taxpayers, while higherrate taxpayers will be taxed at 32.5%, and additional-rate taxpayers at 38.1%.

This may impact on shareholders of private companies paying themselves in the form of dividends, for example, rather than salary. Investors with portfolios that produce an income in the form of dividends of more than £2,000 a year, which are held outside ISA or pensions, will also be affected by the reduction in the allowance.

National Insurance Contributions

Will be charged at 12% of income on earnings above £8,424, up from £8,164 until you are earning more than £46,350, after which the rate drops to 2%. It’s the same in Scotland.

Auto enrolment contributions

Auto enrolment contribution rates have increased for employees and employers. In the previous 2017/18 tax year, the minimum pension contribution rate was 1% from the employee and 1% from the employer, which provides a 2% contribution. However, from 6 April 2018, the contribution rate increased to 3% for employees and 2% from the employer, totalling 5%.

Pension Lifetime Allowance

The Lifetime Allowance increased from £1 million to £1.03 million in the 2018/19 tax year. This is the maximum total amount you can hold within all your pension savings without having to pay extra tax when you withdraw money from them.

If the total value of your pension savings goes over the Lifetime Allowance, any excess will be taxed at a rate of 25% in addition to your marginal rate of Income Tax if drawn as income, or 55% if you take it as a lump sum.

State Pension

There has been a 3% rise for the old basic State Pension and the new flat-rate State Pension. If you’re on the basic State Pension (previously £122.30 per week), this has increased to £125.95. The flat-rate State Pension has increased from £159.55 to £164.35 a week.

Inheritance Tax

The residence nil-rate band (RNRB) has risen from £100,000 to £125,000. The RNRB enables eligible people to pass on a property to direct descendants and potentially save on death duties.

Capital Gains Tax

Capital Gains Tax is charged on profits that are made when certain assets are either transferred or sold. There’s no tax to pay if all gains made in a tax year fall within the annual Capital Gains Tax allowance. For the 2018/19 tax year, this is £11,700 (it was £11,300 for the 2017/18 tax year).

Buy-to-let landlords

Changes mean that only 50% of mortgage interest will be able to be offset when calculating a tax bill, compared with 75% previously.

LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE, AND THEIR VALUE DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF THE INVESTOR.

Making the most of your pensions

Have you accumulated multiple plans that need reviewing?

Consolidating your pensions means bringing them together into a new plan, so you can manage your retirement saving in one place. It can be a complex decision to work out whether you would be better or worse off combining your pensions, but by making the most of your pensions now, this could have a significant impact on your retirement.

Retirement savings in one place
Whenever you decide to do it, when you retire it could be easier having a single view of all of your retirement savings in one place. However, not all pension types can or should be transferred. It’s important that you obtain professional advice to compare the features and benefits of the plan(s) you are thinking of transferring.

Some alternative pension options may offer the potential for a better investment return than existing pensions – giving the opportunity to boost savings in retirement, without saving any more. In addition, some people might benefit from moving their money to a pension that offers funds with less risk – which may not have been available before. This could be particularly important as someone moves towards retirement, when they might not want to take as much risk with their money they’ve saved throughout their working life.

Keeping track of the charges
If someone has several different pensions, it can be difficult to keep track of the charges they’re paying to existing pension providers. By combining pensions into a new plan, lower charges could be available – providing the opportunity to further boost retirement savings. However, it’s important to fully understand the charges on existing plans before considering consolidating pensions.

Combining pensions into one pot also reduces paperwork and makes it easier to estimate the income someone can expect to receive in retirement. However, before the decision is made to consolidate pensions, it’s essential to make sure there are no loss of benefits attributable to an existing pension.

Review your pension situation regularly
It’s essential that you review your pension situation regularly. If appropriate to your particular situation and only after receiving professional financial advice, pension consolidation could enable existing policies to be brought together in one place, ensuring they are managed correctly in line with your wider objectives.

Gone are the days of a job for life. So many of us may have several pensions accumulated over the years – some of which we may have left with former employers and forgotten about! Don’t forget your pension can and should work for you to provide a better quality of life when you retire. Looked after correctly, it can enable you to do more in retirement, or even start your retirement early.

A PENSION IS A LONG-TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

This time next year we’ll be ‘million-heirs’

Larger individual wealth and expectation of substantial inheritances

Put simply, Inheritance Tax is a tax charged on your estate when you die. The Government set a tax-free allowance called the ‘nil-rate band’, which is currently £325,000. Any amount above this level is taxed at 40%. Your estate is the value of everything you own, such as your house, car, investments, life assurance policies and the contents of your home.

UK’s massive wealth increase
One person in 25 expect to become ‘million-heirs’ and inherit an estate worth £1 million or more, according to Canada Life’s [1] annual Inheritance Tax Monitor survey of people over 45. Around one person in 50 expects to inherit more than £5 million.

The figures reveal the financial impact of the UK’s massive wealth increase in recent decades, with rising stock markets and increased property values contributing to larger individual wealth and the expectation of substantial inheritances.

Lack of knowledge around the rules
However, without financial planning, much of the estate is likely to be lost in Inheritance Tax for assets above the available nil-rate band threshold. On an estate worth £1 million, over one fifth (£230,000) would be lost in Inheritance Tax, or roughly the equivalent of an average UK house price.
Compounding the problem is the lack of knowledge around the Inheritance Tax rules. The majority of people (70%) could not identify the standard nil-rate tax threshold (£325,000). Meanwhile, only one in 20 of those surveyed knew about the residence nil-rate band tapering for estates over £2 million, likely leading to greater tax bills for larger inheritances.

Substantial amounts of money lost in tax
People’s expectations are likely to be substantially wrong without financial planning, and it’s quite likely they could lose substantial amounts of money in tax. Yet it’s quite possible to ensure that by using a straightforward trust, the entire amount goes where it is intended – the beneficiaries.
There are several straightforward ways to reduce the amount of Inheritance Tax that is due. And for people expecting around £500,000 or more in inheritance, there is still a danger of losing tens of thousands of pounds in tax. The risk of a big Inheritance Tax bill drops to zero at the Inheritance Tax threshold of £325,000, below which there is no tax.

Source data:
[1] Survey of 1,001 UK consumers aged 45 or over with total assets exceeding the standard inheritance nil-rate band of £325,000. Carried out in October 2017. Percentages may not add up to 100 due to rounding or multiple answer questions. Research conducted by Atomik.

Money’s too tight to mention

Financial impact on annual retirement income after divorce

However, for some couples, no amount of marriage counselling is enough to avoid a divorce. It’s a tough process emotionally and financially. Untangling two people’s money can be messy. Long before spousal or child support is awarded or your post-divorce budget is in place, you’ll need to prepare your finances for the work ahead.

Marriage breakdown impact on pension saving
Divorcees who plan to retire in 2018 can expect their yearly income to drop by £3,800 compared to those who’ve never divorced, new research[1] shows. The findings reveal that the expected annual retirement income for those divorcees retiring in 2018 is £17,600, compared with £21,400 for those who have never experienced a marriage break up.

The latest available divorce statistics from the Office of National Statistics[2] covering up to 2016 showed that the number of people getting divorced has started to rise again, and that those over the age of 55 saw the greatest increase in 2016 compared to 2015.

Divorcees are more likely to retire in debt
Those who have been divorced are more likely to retire in debt (23%) than those who have never been divorced (16%). But it’s not all bad news for divorcees though, as they will retire with lower debts (£30,500 compared with £36,900).

However, divorcees are more likely to have no pension savings at all when they retire (15%) than those who haven’t been through a divorce (11%). And they’re less likely to reach the minimum standard for their annual income set by the standards the Joseph Rowntree Foundation (JRF).

Huge financial impact on people’s lives
Around one in seven (14%) who have been divorced expect to have incomes lower than the JRF’s benchmark of £192.27 a week, or £9,998 a year, compared with 12% of those who have never been divorced.

Divorce can have a huge financial impact on people’s lives. Many may not realise that the cost of divorce can last well into retirement, as divorcees expect retirement incomes of nearly £4,000 less each year than those who have never been divorced.

One of the most complex assets to split
The stress of getting through a divorce can mean people understandably focus on the immediate priorities like living arrangements and childcare, but a pension fund and income in retirement should also be a priority. A pension fund is one of the most complex assets a couple will have to split, so anyone going through a divorce should seek legal and professional financial advice to help them do so.
For many more couples, the increase in value of pensions mean that it is often the largest asset. It goes without saying that advice is crucial as early as possible in any separation where couples have joint assets.

The heart wants what the heart wants
This research highlights the importance of divorced couples continuing to pay into their pensions even after a pension share on divorce has been implemented. Usually, a pension built up during the marriage is shared equally on divorce. If the divorcing couple are some way off retirement, this often gives the person receiving the pension share the chance to plan.

The old saying about love is that ‘the heart wants what the heart wants’. When the heart wants a divorce, it can feel like your world is turning upside down. While divorces are gut-wrenching emotionally, the financial implications can be equally devastating.

Source data:
[1] Research Plus ran an independent online survey for Prudential between 29 November and 11 December 2017 among 9,896 non-retired UK adults aged 45+,
including 1,000 planning to retire in 2018.
[2] Latest divorce statistics from the Office of National Statistics, published 18 October 2017 – https://www.ons.gov.uk/peoplepopulationandcommunity birthsdeathsandmarriages/divorce/bulletins/divorcesinenglandandwales/2016
All expected income figures rounded to the nearest £100.

One in eight will retire with no pension in 2018

Excuses to avoid facing the difficult work of saving for retirement

Retirement is one of our biggest financial challenges. As with any daunting challenges we face, we tend to think up excuses so we can avoid facing the difficult work of saving for retirement. Worryingly, nearly one in eight people retiring this year (12%) have made no provision for their retirement, including 10% who will either be totally or somewhat reliant on the State Pension, according to new research[1].

This leaves some retirees starting their retirement with an income of just £1,452 a year, below the Joseph Rowntree Foundation’s (JRF) Minimum Income Standard for a single pensioner[2]. But neither panicking nor putting off the matter will solve the problem. For those people that have a shortfall in their retirement savings, there are many immediate steps that can and should be taken. If you have any concerns about your retirement provision, we can help you look at the different options available to you.

Planning to retire without a pension
There is good news, as the numbers retiring without a pension is lower than the 14% in 2017, and now nearly half the 23% recorded in 2008. Women are more likely to have no retirement savings – 18% will retire without a pension this year, compared with 7% of men. The gap is narrowing over time – in 2016, 22% per of women had no retirement savings, compared with 7% of men, while in 2008, a third of women (32%) were planning to retire without a pension.

An acceptable standard of living
A tenth (10%) of those retiring in 2018 will either rely somewhat or solely on the State Pension, which for those retiring after April this year will mean an income of £164.35 a week[2], or just over £8,500 a year. Taking the JRF’s Minimum Income Standard of £192.27 a week for a single pensioner, which is a benchmark of the income required to support an acceptable standard of living[3], those relying on the State Pension will fall short of the minimum standard by £27.92 a week, or £1,452 a year.

Significance of the State Pension
The research highlights the significance of the State Pension to people in retirement, including those with pension savings of their own. On average, people expecting to retire this year estimate that the State Pension will account for more than a third (33%) of their income in retirement.
Of those retiring in 2018 who do have a pension of their own, two fifths (42%) have the majority of their pension in a workplace final salary scheme, one in eight (13%) have their savings in a personal pension which is not through their employer, and 12% have the majority in a workplace defined contribution scheme.

Source data:
[1] Research Plus conducted an independent online survey for Prudential between 29 November and 11 December 2017 among 9.896 non-retired UK adults aged 45+, including 1,000 planning to retire in 2018.
[2] Benefit and pension rates 2018-2019 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/662290/proposed-benefit-and-pension-rates-2018-to-2019.pdf
[3] Figures taken from the 2017 update of the Minimum Income Standard for the United
Kingdom published by the Joseph Rowntree Foundation – https://www.jrf.org.uk/report/minimum-income-standard-uk-2017

A PENSION IS A LONG-TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

Investment trusts

Public company aiming to make money by investing in other companies

Investment trusts, unlike unit trusts, can borrow money to buy shares (known as ‘gearing’). This extra buying potential can produce gains in rising markets but also accentuate losses in falling markets. Investment trusts generally have more freedom to borrow than unit trusts that can be sold to the general public.

BUYING SHARES

Unlike with a unit trust, if an investor wants to sell their shares in an investment trust, they must find someone else to buy their shares – this is usually done by selling on the stock market. The investment trust manager is not obliged to buy back shares before the trust’s winding up date.

The price of shares in an investment trust can be lower or higher than the value of the assets attributable to each share – this is known as ‘trading at a discount’ or ‘at a premium’.

SPLIT CAPITAL INVESTMENT TRUSTS

These run for a specified time, usually five to ten years, although you are not tied in. This type of investment trust issues different types of shares. When they reach the end of their term, payouts are made in order of share type.

You can choose a share type to suit you. Typically, the further along the order of payment the share is, the greater the risk, but the higher the potential return. You also need to bear in mind the price of shares in an investment trust can go up or down so you could get back less than you invested.

ASSET TYPE

The level of risk and return will depend on the investment trust you choose. Its important to know what type of assets the trust will invest in, as some are riskier than others.

In addition, look at the difference between the investment trust’s share price and the value of its assets, as this gap may affect your return. If a discount widens, this can depress returns.

BORROWING MONEY

You need to find out if the investment trust borrows money to buy shares. If so, returns might be better but your losses greater. With a split capital investment trust, the risk and return will depend on the type of shares you buy.

As of April 2016, all individuals are eligible for a £5,000 tax-free Dividend Allowance (this tax-free allowance will fall to £2,000 in April 2018). Dividends received by pension funds or received on shares within an Individual Savings Account (ISA) will remain tax-efficient and won’t impact your dividend allowance.

TAX-EFFICIENT

Many unit trusts can be held in an ISA. In this case, your income and capital gains will be tax-efficient.

Any profit you make from selling shares outside an ISA may be subject to Capital Gains Tax.